Emerging markets, including India, need to strengthen their finances and build buffers against volatile foreign capital, Reserve Bank of India Deputy Governor Poonam Gupta said Tuesday.
“External flows are, for most part, fickle,” Gupta said at an event hosted by the Business Standard newspaper in Mumbai. She added that such volatility is something emerging markets have to contend with. “You continue to work on your domestic finances becoming stronger, so that you reduce your dependence on external finance in a macro way.”
Foreign money has become a less reliable source of financing for Asia’s third-largest economy despite its rapid growth, adding to pressure on the rupee. Capital inflows weakened sharply in the year through March, forcing India to dip into its foreign-exchange reserves to finance its external deficit.
The rupee has borne much of the strain. It has recovered to around 95.20 per dollar from a record low of nearly 97 earlier this month, but remains down more than 5.5% this year, making it one of Asia’s worst-performing currencies.
The RBI has taken steps to attract foreign inflows, including from India’s vast diaspora, while also seeking to curb speculation in the currency market. Earlier this month, the central bank unveiled sweeping measures aimed at reducing excessive bets against the rupee.